Tech private equity investor Orlando Bravo says the mantra of ‘growth

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Software has been one of the worst-performing sectors this year amid a rising rate environment and geopolitical tensions overseas. 

This comes as no shock to Orlando Bravo who helms tech-focused private equity firm Thoma Bravo. He says the mantra of ‘growth at all costs’ is over and that investors are slowly shifting their focus from momentum to fundamentals and profitability.  

Bravo sat down with the Delivering Alpha newsletter to discuss what he thinks are structural problems in the software industry, the revaluation in tech, and the growing cybersecurity risk emanating from Europe. 

 (The below has been edited for length and clarity. See above for full video.)

Leslie Picker: There has been a massive shift in 2022, there’s just this macro change afoot. How does that impact what you do and what do you make of the recent revaluation in the [tech] sector?

Orlando Bravo: It was just a long time coming. I mean, we’ve been on a decade of tailwinds not only in the software industry, but in multiples. And what happened recently is that multiples of these growth stocks went from 20x to 10x. They got cut in half. Now why is that? Our theme and our thesis on it in talking to the big investors, sovereign wealth funds, big state pension plans, the original sources of capital, is that people are getting tired of being money-losing operations. They’re finally digging into the business models, looking at when profitability is going to come and discounting assets that have high growth, but no near-term prospects for profitability. So that correction is here and it’s happened and it’s in effect today. Now how does that affect our business? That is phenomenal on the buy side for our business because we are focused on buying the entire company, not in buying pieces of paper where you’re dependent on what others think. So it gives us an opportunity to do the one thing that we do really well and focus on which is to take these high-growth, innovative companies and put together an operating framework that allows them to be profitable as well and create profitable growth engines.

Picker: Would you say at this point in time that the sell-off is really priced in or do you think that valuations still have further to go before they’re at their intrinsic value, in your estimation?

Bravo: As a business owner, and as a participant in the private equity industry, it’s looking extremely attractive for groups like us, because once again, you can partner with companies and change their operational makeup by inspiring leadership. And these assets can produce big cash flow, not 20 EBIT/EBITDA margins, but 50% at growth and scale. So if you can price in your improvements, it looks extremely attractive. Now for the public markets, the problem is that once again, you don’t have control. So what is the bottom price on a revenue multiple when you’re unprofitable, especially when you miss your numbers? And now even…